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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________
FORM 10-Q
_____________________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from               to                    
Commission file number: 001-38210
_____________________________________________________
Krystal Biotech, Inc.
(Exact name of registrant as specified in its charter)
_____________________________________________________

Delaware82-1080209
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
2100 Wharton Street, Suite 701
Pittsburgh, Pennsylvania 15203
(Address of principal executive offices and zip code)
(412) 586-5830
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
_____________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading
Symbol(s)
Name of each exchange on which registered
Common StockKRYSNASDAQ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company    
If emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
As of October 30, 2020, there were 19,707,620 shares of the registrant’s common stock issued and outstanding.



Krystal Biotech, Inc.
TABLE OF CONTENTS
  Page No.
  
  
  
  
  
  
  
  
 
 
 
  
 
   
 
 
 
 
 
 
 
   
 

2


PART I. FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS (UNAUDITED)

Krystal Biotech, Inc.
Condensed Consolidated Balance Sheets
(unaudited)
(In thousands, except shares and per share data)September 30,
2020
December 31,
2019
Assets
Current assets
Cash and cash equivalents$282,369 $187,514 
Short-term investments3,996 6,171 
Prepaid expenses and other current assets1,287 2,195 
Total current assets287,652 195,880 
Property and equipment, net17,512 8,475 
Long-term investments 497 
Prepaid rent2,400  
Right-of-use asset2,476 2,709 
Other non-current assets1,411 1,462 
Total assets$311,451 $209,023 
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable$2,591 $1,021 
Current portion of lease liability564 480 
Accrued expenses and other current liabilities4,043 1,826 
Total current liabilities7,198 3,327 
Lease liability2,533 2,782 
Total liabilities9,731 6,109 
Commitments and contingencies (Note 6)
Stockholders' equity
Preferred stock; $0.00001 par value; 20,000,000 shares authorized at
   September 30, 2020 (unaudited) and December 31, 2019; 2,061,773
   shares issued, and no shares outstanding at September 30, 2020
   (unaudited) and December 31, 2019
  
Common stock; $0.00001 par value; 80,000,000 shares authorized at
   September 30, 2020 (unaudited) and December 31, 2019; 19,706,870
   and 17,354,310 shares issued and outstanding at September 30, 2020
   (unaudited) and December 31, 2019, respectively
  
Additional paid-in capital362,531 241,951 
Accumulated other comprehensive income20 10 
Accumulated deficit(60,831)(39,047)
Total stockholders' equity301,720 202,914 
Total liabilities and stockholders' equity$311,451 $209,023 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3


Krystal Biotech, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(unaudited)

 Three Months Ended
September 30,
Nine Months Ended
September 30,
(In thousands, except share and per share data)2020201920202019
Expenses
Research and development$5,100 $3,885 $12,264 $11,267 
General and administrative4,580 1,457 10,315 4,660 
Total operating expenses9,680 5,342 22,579 15,927 
Loss from operations(9,680)(5,342)(22,579)(15,927)
Other Income
Interest and other income, net70 1,070 795 2,196 
Net loss(9,610)(4,272)(21,784)(13,731)
Unrealized gain (loss) on available-for-sale securities(20)(7)10 9 
Comprehensive loss$(9,630)$(4,279)$(21,774)$(13,722)
Net loss per common share:
   Basic and diluted
$(0.49)$(0.25)$(1.18)$(0.89)
Weighted-average common shares outstanding:
   Basic and diluted
19,676,016 17,291,245 18,477,495 15,420,995 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4


Krystal Biotech, Inc.
Condensed Consolidated Statements of Stockholders' Equity
(unaudited)
 Common StockAdditional Paid-inAccumulated Other ComprehensiveAccumulatedTotal
Stockholders'
(In thousands, except shares)SharesAmountCapitalIncomeDeficitEquity
Balances at January 1, 202017,354,310 $— $241,951 $10 $(39,047)$202,914 
Issuance of common stock, net16,254 — 243 — — 243 
Stock-based compensation expense— — 539 — — 539 
Unrealized gain on investments— — — 14 — 14 
Net loss— — — — (5,341)(5,341)
Balances at March 31, 202017,370,564 $— $242,733 $24 $(44,388)$198,369 
Issuance of common stock, net2,293,495 — 117,337 — — 117,337 
Stock-based compensation expense— — 807 — — 807 
Unrealized gain on investments— — — 16 — 16 
Net loss— — — — (6,833)(6,833)
Balances at June 30, 202019,664,059 $— $360,877 $40 $(51,221)$309,696 
Issuance of common stock, net42,811 — 298 — — 298 
Stock-based compensation expense— — 1,356 — — 1,356 
Unrealized loss on investments— — — (20)— (20)
Net loss— — — — (9,610)(9,610)
Balances at September 30, 202019,706,870 $— $362,531 $20 $(60,831)$301,720 
 Common StockAdditional Paid-inAccumulated Other Comprehensive AccumulatedTotal
Stockholders'
(In thousands, except shares)SharesAmountCapitalIncomeDeficitEquity
Balances at January 1, 201914,428,916 $— $133,183 $2 $(19,959)$113,226 
Issuance of common stock, net14,653 — 44 — — 44 
Stock-based compensation expense— — 313 — — 313 
Unrealized gain on investments— — — 14 — 14 
Net loss— — — — (4,111)(4,111)
Balances at March 31, 201914,443,569 $— $133,540 $16 $(24,070)$109,486 
Issuance of common stock, net2,501,500 — 93,825 — — 93,825 
Stock-based compensation expense— — 325 — — 325 
Unrealized gain on investments— — — 2 — 2 
Net loss— — — — (5,348)(5,348)
Balances at June 30, 201916,945,069 $— $227,690 $18 $(29,418)$198,290 
Issuance of common stock, net362,571 — 13,357 — — 13,357 
Stock-based compensation expense— — 278 — — 278 
Unrealized loss on investments— — — (7)— (7)
Net loss— — — — (4,272)(4,272)
Balances at September 30, 201917,307,640 $— $241,325 $11 $(33,690)$207,646 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5


Krystal Biotech, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)

 Nine Months Ended September 30,
(In thousands)20202019
Operating Activities
Net loss$(21,784)$(13,731)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization1,361 753 
Stock-based compensation expense2,702 916 
Loss on disposals of fixed assets33 54 
Changes in operating assets and liabilities
Prepaid expenses and other current assets489 (465)
Prepaid rent(2,400) 
Lease liability(165)(55)
Accounts payable725 170 
Accrued expenses and other current liabilities980 668 
Net cash used in operating activities(18,059)(11,690)
Investing Activities
Purchases of property and equipment(7,636)(4,120)
Purchases of short-term investments(3,205)(6,867)
Proceeds from maturities of short-term investments5,877 6,587 
Net cash used in investing activities(4,964)(4,400)
Financing Activities
Issuance of common stock, net117,878 107,226 
Net cash provided by financing activities117,878 107,226 
Net increase in cash and cash equivalents94,855 91,136 
Cash and cash equivalents at beginning of period187,514 103,670 
Cash and cash equivalents at end of period$282,369 $194,806 
Supplemental Disclosures of Non-Cash Investing and Financing Activities
Unpaid purchases of property and equipment$3,173 $1,026 
Initial recognition of right-of-use assets$ $3,066 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6


Krystal Biotech, Inc.  
Notes to Condensed Consolidated Financial Statements
(unaudited)
1.    Organization
Krystal Biotech, Inc. and its consolidated subsidiary (the “Company,” or “we” or other similar pronouns) commenced operations in April 2016. On March 31, 2017, the Company converted from a California limited liability company to a Delaware C-corporation, and changed its name from Krystal Biotech, LLC to Krystal Biotech, Inc. On June 19, 2018, the Company incorporated Krystal Australia Pty Ltd., an Australian proprietary limited company, for the purposes of undertaking preclinical and clinical studies in Australia. On April 24, 2019, the Company incorporated Jeune, Inc. in Delaware, a wholly-owned subsidiary, for the purpose of undertaking preclinical studies for aesthetic skin conditions.
We are a clinical stage gene therapy company developing a new class of transformative medicines to treat diseases caused by gene or protein dysfunction or absence. Using our patented platform that is based on engineered herpes simplex virus type 1 (“HSV-1”), we create vectors that encode functional proteins. Our vector is designed to be specifically and efficiently delivered to the target cell in an outpatient setting, via topical, intradermal or inhaled routes of administration, where the cell’s own machinery transcribes and translates the encoded protein, restoring or augmenting protein function to treat or prevent disease. We are primarily focused on applying our platform to treat rare monogenic skin conditions caused by insufficient or completely absent protein production.  We have expanded our pipeline products to develop medicines to treat chronic, non-monogenic skin diseases and aesthetic skin conditions. Recognizing the breadth and potential transformative power of our HSV-1 vector platform, we have started expanding the scope of our product development beyond skin and have begun preclinical efforts in the field of pulmonary diseases.
Liquidity
As of September 30, 2020, the Company had an accumulated deficit of $60.8 million. With the net proceeds raised from its public and private securities offerings, including the public offering completed in May 21, 2020, the Company believes that its cash, cash equivalents and short-term investments of approximately $286.4 million as of September 30, 2020 will be sufficient to allow the Company to fund its planned operations for at least the next 12 months from the date of this Quarterly Report on Form 10-Q. As the Company continues to incur losses, a transition to profitability is dependent upon the successful development, approval and commercialization of its product candidates and the achievement of a level of revenues adequate to support the Company’s cost structure. The Company may never achieve profitability and unless and until it does, the Company will continue to need to raise additional capital or obtain financing from other sources. Management intends to fund future operations through the sale of equity and debt financings and may also seek additional capital through arrangements with strategic partners or other sources. There can be no assurance that additional funding will be available on terms acceptable to the Company, if at all.
The Company is subject to risks common to companies in the biotechnology industry, including but not limited to the failure of product candidates in clinical and preclinical studies, the development of competing product candidates or other technological innovations by competitors, dependence on key personnel, protection of proprietary technology, compliance with government regulations and the ability to commercialize product candidates.
2.    Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited interim condensed financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), as found in the Accounting Standards Codification (“ASC”), the Accounting Standards Update (“ASU”), of the Financial Accounting Standards Board (“FASB”), and the rules and regulations of the US Securities and Exchange Commission (“SEC”). All intercompany balances and transactions have been eliminated in consolidation.  Certain prior period amounts have been reclassified to conform to the current period presentation. The reclassified amounts have no impact on the Company’s previously reported financial position or results of operation.
These unaudited interim condensed financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as filed with the SEC on March 10, 2020.
7


Risks and Uncertainties
The pandemic caused by an outbreak of a new strain of coronavirus (“COVID-19”) has resulted, and is likely to continue to result, in significant national and global economic disruption and may adversely affect our business. The Company is actively monitoring the impact of COVID-19 and the possible effects on its financial condition, liquidity, operations, suppliers, industry, and workforce. However, the full extent, consequences, and duration of the COVID-19 pandemic and the resulting impact on the Company cannot currently be predicted. The Company will continue to evaluate the impact that these events could have on the operations, financial position, and the results of operations and cash flows during fiscal year 2020.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the condensed consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates. Management considers many factors in selecting appropriate financial accounting policies and controls, and in developing the estimates and assumptions that are used in the preparation of these financial statements. Management must apply significant judgment in this process. In addition, other factors may affect estimates, including expected business and operational changes, sensitivity and volatility associated with the assumptions used in developing estimates, and whether historical trends are expected to be representative of future trends. The estimation process often may yield a range of potentially reasonable estimates of the ultimate future outcomes and management must select an amount that falls within that range of reasonable estimates. This process may result in actual results differing materially from those estimated amounts used in the preparation of the financial statements. Estimates are used in the following areas including stock-based compensation expense, accrued expenses, the fair value of financial instruments, incremental borrowing rate for lease liability, and the valuation allowance included in the deferred income tax calculation.
Segment and Geographical Information
Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company and the Company’s chief operating decision maker view the Company’s operations and manage its business in one operating segment, which is the business of developing and commercializing pharmaceuticals.  
Concentrations of Credit Risk and Off-Balance Sheet Risk
Financial instruments that potentially subject the Company to credit risk consist of cash, cash equivalents and investments. The Company’s policy is to invest its cash, cash equivalents and investments in money market funds, certificates of deposit and various other bank deposit accounts. The counterparties to the agreements relating to the Company’s investments consist of financial institutions of high credit standing. The Company is exposed to credit risk in the event of default by the financial institutions to the extent amounts recorded on the balance sheets are in excess of insured limits. The Company has not experienced any credit losses in such accounts and does not believe it is exposed to any significant credit risk on these funds. The Company has no financial instruments with off-balance sheet risk of loss.
Cash, Cash Equivalents and Investments
Cash and cash equivalents consist of money market funds and bank deposits. Cash equivalents are defined as short-term, highly liquid investments with original maturities of 90 days or less at the date of purchase.
Investments with maturities of greater than 90 days but less than one year are classified as short-term investments on the consolidated balance sheets and consist of US Treasury bills and certificates of deposit. Investments with maturities of greater than one year are classified as long-term investments on the consolidated balance sheets and consist of certificates of deposit. Accrued interest on US Treasury bills and certificates of deposit are also classified as short-term investments.
As our entire investment portfolio is considered available for use in current operations, we classify all investments as available-for-sale securities. Available-for-sale securities are carried at fair value, with unrealized gains and losses reported in accumulated other comprehensive loss, which is a separate component of stockholders’ equity in the consolidated balance sheets.
8


Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There is a three-level hierarchy that prioritizes the inputs used in determining fair value by their reliability and preferred use, as follows:
Level 1— Valuations based on quoted prices in active markets for identical assets or liabilities.
Level 2— Valuations based on quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data.
Level 3— Valuations based on inputs that are both significant to the fair value measurement and unobservable.
To the extent that a valuation is based on models or inputs that are less observable, or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized within Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
There have been no significant changes to the valuation methods utilized by the Company during the periods presented. There have been no transfers between Level 1, Level 2, and Level 3 in any periods presented.
The carrying amounts of financial instruments consisting of cash and cash equivalents, investments, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities included in the Company’s financial statements, are reasonable estimates of fair value, primarily due to their short maturities. Marketable securities are classified as long-term investments if the Company has the ability and intent to hold them and such holding period is longer than one year. The Company classifies all of its investments as available-for-sale.
Our available-for-sale, short-term investments, which consist of US Treasury bills and certificates of deposit, are considered to be Level 2 valuations. The fair value of Level 2 financial assets is determined using inputs that are observable in the market or can be derived principally from or corroborated by observable market data, such as pricing for similar securities, recently executed transactions, cash flow models with yield curves, and benchmark securities. In addition, Level 2 financial instruments are valued using comparisons to like-kind financial instruments and models that use readily observable market data as their basis.
Property and Equipment, net
Property and equipment, net, is stated at cost, less accumulated depreciation. Maintenance and repairs that do not improve or extend the lives of the respective assets are expensed to operations as incurred, while costs of major additions and betterments are capitalized. Upon disposal, the related cost and accumulated depreciation is removed from the accounts and any resulting gain or loss is included in the results of operations. Depreciation is recorded using the straight-line method over the estimated useful lives of the respective assets, which are as follows:

Computer equipment and software3 years
Lab equipment
3 -7 years
Furniture and fixtures3 years
Leasehold improvement
shorter of 8 years or remaining life of lease
Construction-in-progress is not depreciated until the asset is placed in service.
Impairment of Long-Lived Assets
The Company evaluates long-lived assets for potential impairment when events or changes in circumstances indicate the carrying value of the assets may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition are less than the carrying amount of the asset. The Company has not recognized any impairment losses for the three and nine months ended September 30, 2020 and 2019.
9


Leases
We have entered into lease agreements for our laboratory, manufacturing and office spaces. On January 1, 2019, we adopted ASC 842 – Leases. Pursuant to ASC 842, all of our leases outstanding on January 1, 2019 continued to be classified as operating leases. With the adoption of ASC 842, we recorded an operating lease right-of-use asset of $1.1 million and an operating lease liability of $1.4 million on the condensed consolidated balance sheet. Right-of-use lease assets represent our right to use the underlying asset during the lease term and the lease obligations represent our commitment to make lease payments arising from the lease. Right-of-use lease assets and obligations were recognized based on the present value of remaining lease payments over the lease term. As the Company’s lease agreements do not provide an implicit rate and as the Company does not have any external borrowings, we have used an estimated incremental borrowing rate based on the information available at lease commencement in determining the present value of lease payments.  Operating lease expense is recognized on a straight-line basis over the lease term. Variable lease expense is recognized in the period in which the obligation for the payment is incurred. The Company adopted the new lease standard as of the effective date of January 1, 2019, with no restatement of prior periods or cumulative adjustment to retained earnings. Upon adoption, the Company took advantage of the transition package of practical expedients permitted within ASC 842, which allowed the Company not to reassess previous accounting conclusions around whether arrangements were, or contained, leases, as well as to carry forward both the historical classification of leases and the treatment of initial direct costs for existing leases. In addition, the Company also has made an accounting policy election to exclude leases with an initial term of twelve months or less from its balance sheet and to account for lease and non-lease components of its operating leases as a single component.
Research and Development Expenses
Research and development costs are charged to expense as incurred in performing research and development activities. The costs include employee compensation costs, facilities and overhead, preclinical and clinical activities, related clinical manufacturing costs, contract management services, regulatory and other related costs.
The Company estimates contract research and clinical trials materials manufacturing expenses based on the services performed pursuant to contracts with research and manufacturing organizations that manufacture materials used in the Company’s ongoing preclinical and clinical studies. Nonrefundable advanced payments for goods or services to be received in the future for use in research and development activities are deferred and capitalized. The capitalized amounts are expensed as the related goods are delivered or the services are performed.
In accruing service fees, the Company estimates the time period over which services will be performed and the level of effort to be expended in each period. These estimates are based on communications with the third-party service providers and the Company’s estimates of accrued expenses using information available at each balance sheet date. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust the accrual accordingly.
Stock-Based Compensation Expense
The Company accounts for its stock-based compensation awards in accordance with FASB ASC Topic 718, Compensation-Stock Compensation (“ASC 718”). ASC 718 requires all stock-based payments, including grants of stock options and restricted stock, to be recognized in the statements of operations based on their grant-date fair values. Compensation expense is recognized on a straight-line basis based on the grant-date fair value over the associated service period of the award, which is generally the vesting term.
The Company estimates the fair value of its stock options using the Black-Scholes option pricing model, which requires the input of subjective assumptions, including: (i) the expected stock price volatility; (ii) the expected term of the award; (iii) the risk-free interest rate; and (iv) expected dividends. Due to the lack of sufficient history and trading volume of our Common Stock and a lack of Company-specific historical and implied volatility data, the Company has based its estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. When selecting these public companies on which it has based its expected stock price volatility, the Company selected companies with comparable characteristics to it, including enterprise value, risk profiles, position within the industry, and with historical share price information sufficient to meet the expected term of the stock-based awards. The Company computes historical volatility data using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of the stock-based awards. The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own stock price becomes available.
Due to the lack of Company-specific historical option activity, the Company has estimated the expected term of its employee stock options using the “simplified” method, whereby the expected term equals the arithmetic mean of the vesting term and the original contractual term of the option. The risk-free interest rates are based on the US Treasury securities with a maturity date commensurate with the expected term of the associated award. The Company has never paid and does not expect
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to pay dividends in the foreseeable future. The Company is also required to estimate forfeitures at the time of grant and to revise those estimates in subsequent periods if actual forfeitures differ from its estimates. To the extent that actual forfeitures differ from the Company’s estimates, the differences are recorded as a cumulative adjustment in the period the estimates were revised.
Comprehensive Loss
Comprehensive loss is defined as the change in equity during a period from transactions from non-owner sources. Unrealized gains or losses on available-for-sale securities is a component of other comprehensive gains or losses and is presented net of taxes. We have not recorded any reclassifications from other comprehensive gains or losses to net loss during any period presented.
Recent Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-13 - Fair Value Measurement (Topic 820) (“ASU 2018-13”) which removes, modifies and adds disclosure requirements on fair value measurements. ASU 2018-13 removes disclosure requirements for transfers between Level 1 and Level 2 measurements and valuation processes for Level 3 measurements but adds new disclosure requirements including changes in unrealized gains/losses in other comprehensive income related to recurring Level 3 measurements. The amended guidance was effective for us commencing in the first quarter of 2020. Certain aspects may be applied prospectively while other aspects may be applied retrospectively upon the effective date. The adoption of the guidance resulted in us disclosing the Company’s cash, cash equivalents and available-for-sale securities by significant investment category as of September 30, 2020 and 2019.
3.    Net Loss Per Share Attributable to Common Stockholders
Basic net loss per share attributable to common stockholders is calculated by dividing net loss attributable to common stockholders by the weighted average shares outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share attributable to common stockholders is computed by dividing the net loss by the weighted-average number of shares of common stock and common share equivalents outstanding for the period. Stock options are common share equivalents. There were 853,336 and 452,311 common share equivalents outstanding as of September 30, 2020 and 2019, respectively, in the form of stock options, that have been excluded from the calculation of diluted net loss per common share as their effect would be anti-dilutive for all periods presented.

Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
(In thousands, except shares and per share data)(Unaudited)(Unaudited)
Numerator:    
Net loss per common share$(9,610)$(4,272)$(21,784)$(13,731)
Denominator:
Weighted-average basic and
   diluted common shares
19,676,016 17,291,245 18,477,495 15,420,995 
Basic and diluted net loss per
   common share
$(0.49)$(0.25)$(1.18)$(0.89)

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4.    Fair Value Instruments
The following tables show the Company’s cash, cash equivalents and available-for-sale securities by significant investment category as of September 30, 2020 and December 31, 2019, respectively (in thousands):

 September 30, 2020
(unaudited)
 Amortized CostGross
Unrealized
Gains
Gross
Unrealized
Losses
Aggregate Fair
Value
Cash and Cash
Equivalents
Short-term
Marketable
Securities (1)
Long-term
Marketable
Securities (2)
Level 1:       
Cash$3 $— $— $3 $3 $— $— 
Money market instruments282,366 — — 282,366 282,366 — — 
Subtotal
282,369 — — 282,369 282,369 — — 
Level 2:
U.S. government agency securities501 2 — 503 — 503 — 
Certificates of deposit3,474 19 — 3,493 — 3,493 — 
Subtotal
3,975 21 — 3,996 — 3,996 — 
Total$286,344 $21 $— $286,365 $282,369 $3,996 $— 
 December 31, 2019
 Amortized CostGross
Unrealized
Gains
Gross
Unrealized
Losses
Aggregate Fair
Value
Cash and Cash
Equivalents
Short-term
Marketable
Securities (1)
Long-term
Marketable
Securities (2)
Level 1:       
Cash$3 $— $— $3 $3 $— $— 
Money market instruments187,511 — — 187,511 187,511 — — 
Subtotal187,514 — — 187,514 187,514 — — 

Level 2:
U.S. government agency securities1,747 6 — 1,753 — 1,753 — 
Certificates of deposit4,911 4 — 4,915 — 4,418 497 
Subtotal6,658 10 — 6,668 — 6,171 497 
Total$194,172 $10 $— $194,182 $187,514 $6,171 $497 
(1)The Company’s short-term marketable securities mature in one year or less.
(2)The Company’s long-term marketable securities mature between one year and two years.
See Note 2 to these unaudited condensed consolidated financial statements for additional discussion regarding the Company’s fair value measurements.
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5.    Balance Sheet Components
Property and Equipment, Net
Property and equipment, net consist of the following (in thousands):
 September 30,
2020
December 31,
2019
 (Unaudited) 
Construction-in-progress$9,389 $2,431 
Leasehold improvements4,712 3,179 
Furniture and fixtures854 99 
Computer equipment and software67 45 
Laboratory equipment4,457 3,571 
Total property and equipment19,479 9,325 
Accumulated depreciation and amortization(1,967)(850)
Property and equipment, net$17,512 $8,475 
Depreciation expense was $399 thousand and $1.1 million for the three and nine months ended September 30, 2020, respectively, and $190 thousand and $498 thousand for the three and nine months ended September 30, 2019, respectively.
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
 September 30,
2020
December 31,
2019
 (Unaudited) 
Accrued preclinical and clinical expenses$969 $977 
Accrued professional fees358 24 
Accrued payroll and benefits1,096 510 
Accrued taxes30 40 
Accrued construction in progress1,577 263 
Other current liabilities13 12 
Total$4,043 $1,826 

6.    Commitments and Contingencies
Significant Contracts and Agreements
Lease Agreements
On May 26, 2016, the Company signed an operating lease for laboratory and office space that commenced in June 2016 and expired on October 31, 2017 (the “2016 Lease”). The 2016 Lease was amended to increase the area leased to approximately 31,000 square feet and to extend the expiration date to February 28, 2027, including 6,000 square feet relating to a month-to-month lease that we utilized through February 2020.
On December 26, 2019, we entered into a lease agreement for our second commercial gene therapy facility (“ASTRA”) in the Pittsburgh, Pennsylvania area (“ASTRA lease”) with Northfield I, LLC (the “Landlord”). The 150,000 square foot facility is under construction and is expected to be completed and validated in 2022. The lease will commence when the space is available for access, which is anticipated to be in 2H 2020, and has an initial term that expires on October 31, 2035. The ASTRA lease contains an option (“Purchase Option”) to purchase the building, related improvements and take corresponding assignment of the Landlord's rights under its existing Ground Lease (the “Ground Lease”). The Purchase Option may be
13


exercised by the Company at any time prior to the date that is thirty days after the initial delivery date, as defined in the lease as the date in which certain delivery conditions have been met by the Landlord. A cash contribution in the amount of $2.4 million was paid to escrow on January 21, 2020. The contribution was intended to reduce the amount of the building construction costs and had the effect of reducing the base rental rate of the lease and as such, is recorded as prepaid rent in the condensed consolidated balance sheet as of September 30, 2020. Refer to Note 10 for additional information.
As of September 30, 2020, future minimum commitments under the Company’s operating leases were as follows (in thousands):
 Operating
Leases
2020 (remaining three months)$274 
20211,358 
20221,385 
20231,413 
20241,441 
Thereafter11,316 
Future minimum operating lease payments$17,187 
Less: Operating lease payments for ASTRA13,195 
Less: Interest895 
Present value of lease liability$3,097 

Supplemental condensed consolidated balance sheet information related to leases is as follows:
(unaudited)
 September 30, 2020September 30, 2019
Operating leases:  
Right-of-use asset$2,476 $2,796 
Current portion of lease liability564 462 
Lease liability2,533 2,860 
Total lease liability$3,097 $3,322 
Weighted average remaining lease term, in years6.47.4
Weighted average discount rate8.0 %8.0 %

The Company recorded operating lease costs of $148 thousand and $458 thousand for the three and nine months ended September 30, 2020 and $167 thousand and $449 thousand for the three and nine months ended September 30, 2019, respectively, and variable lease costs of $60 thousand and $88 thousand for the three and nine months ended September 30, 2020 and $9 thousand and $26 thousand for the three and nine months ended September 30, 2019.
Clinical Supply and Product Manufacturing Agreements
The Company has entered into various product manufacturing and clinical supply agreements with Contract Manufacturing Organizations (“CMOs”) for the manufacture of clinical trial materials and Contract Research Organizations (“CROs”) for clinical trial services. The product manufacturing and clinical supply agreements provide the terms and conditions under which the CMOs and CROs will formulate, fill, inspect, package, label and test our drug product candidates, B-VEC and KB105 for clinical supply. The Company is obligated to make milestone payments. Additionally, certain raw materials, supplies, outsourced testing and other services for the purposes of batch production will be invoiced separately by the CMOs. The estimated remaining commitment as of September 30, 2020 under these agreements for the manufacturing of our drug product is approximately $4.8 million. The Company is also responsible for the payment of a monthly service fee for project management services for the duration of any agreements. The Company has incurred expenses under these agreements of $1.3 million and $2.3 million for the three months and nine months ended September 30, 2020, respectively, and $1.0 million and $3.0 million for the three and nine months ended September 30, 2019, respectively.
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Other Contractual Obligations
The Company has contracted with various third parties to facilitate, coordinate and perform agreed upon market research activities relating to our lead product candidate, B-VEC. These contracts typically call for the payment of fees for services upon the achievement of certain milestones. Business activities being performed under these contracts primarily include market research and other related activities. The estimated remaining commitment as of September 30, 2020 is $1.2 million. The Company has incurred expenses under these activities of $582 thousand and $1.1 million for the three and nine months ended September 30, 2020, respectively, and zero for the three and nine months ended September 30, 2019, respectively.
Legal Proceedings
On May 1, 2020, a complaint was filed against us in the United States District Court for the Western District of Pennsylvania by PeriphaGen Inc., which also named our chief executive officer and chief operating officer, Krish Krishnan and Suma Krishnan, respectively. The complaint alleges breach of contract and misappropriation of trade secrets, which secrets the plaintiff asserts were used to develop our product candidates, including the vector backbones, and our STAR-D platform. We answered the complaint on June 26, 2020 by denying the allegations and brought a counterclaim asking the court to declare that we did not misappropriate PeriphaGen’s trade secrets or confidential information, and to further declare that we are the rightful and sole owner of our product candidates and STAR-D platform. In addition, we filed a third-party complaint against two principals of PeriphaGen, James Wechuck and David Krisky, alleging breach of contract and seeking contribution and indemnification from them in the event PeriphaGen is awarded damages. On July 29, 2020, PeriphaGen filed its response to our answer and counterclaim, denying the allegations in the counterclaim. On the same day, the Messrs. Wechuck and Krisky filed a motion to dismiss the third-party complaint on various grounds, and we have opposed the motion. Discovery in the case has commenced and is expected to continue into the first half of 2021.
While we are unable to provide any assurances as to the ultimate outcome of the case, we believe the allegations in the complaint are without merit, and we intend to vigorously defend against them. We are currently unable to estimate the costs and timing of any litigation, including any potential damages if PeriphaGen were to prevail on its claims.
7.    Capitalization
Sale of Common Stock
On November 1, 2017, the Company entered into a stock purchase agreement (“the Agreement”), with the Epidermolysis Bullosa Medical Research Foundation, a California not-for-profit corporation (“EBMRF"), and EB Research Partnership, Inc., a New York not-for-profit corporation (“EBRP”), and together with EBMRF, the Purchasers, pursuant to which the Company sold to the Purchasers an aggregate of 70,000 shares of the Company’s common stock for a purchase price of $11.00 per share, or the Transaction. The Agreement contains redemption features whereby the Company is required to repurchase all or a portion of the shares at a purchase price of $11.00 per share or the closing trading price of the common stock on the redemption request date, whichever is higher, should the Company cease commercially reasonable efforts to work on the research plan pursuant to the Agreement. As the remaining redemption feature is within the control of the Company, the issued common stock has been classified as permanent equity. The Company has continued to perform work relating to the research plan and does not intend to cease commercially reasonable efforts to do so.
On June 27, 2019, the Company completed a public offering of 2,500,000 shares of its common stock to the public at $40.00 per share. Net proceeds to the Company from the offering were $93.8 million after deducting underwriting discounts and commissions of approximately $6.0 million, and other offering expenses payable by the Company of approximately $216 thousand. On July 3, 2019, the underwriters exercised their option to purchase an additional 353,946 shares of common stock at $40.00 per share for additional net proceeds of $13.3 million after deducting underwriting discounts and commissions of approximately $849 thousand. In connection with the public offering, the Company suspended its “at-the-market” equity offering program (“ATM Facility”), that had previously been put in place in March 2019 which had allowed the Company to sell shares of its common stock for up to $50.0 million in gross proceeds. Following the completion of the offering, $16.8 million remains suspended under this program.
On May 21, 2020, the Company completed a public offering of 2,275,000 shares of its common stock to the public at $55.00 per share. Net proceeds to the Company from the offering were $117.2 million after deducting underwriting discounts and commissions of approximately $7.5 million, and other offering expenses payable by the Company of approximately $463 thousand.
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8.    Stock-Based Compensation
Stock options granted to employees vest ratably over a four-year period and options granted to directors of the company vest ratably over one year and four-year periods. Stock options have a life of ten years.
The Company granted 195,850 and  740,250 stock options to employees and directors of the Company during the three and nine months ended September 30, 2020, respectively, and 29,500 and 139,000 stock options to employees and directors of the Company during the three and nine months ended September 30, 2019, respectively.
The following table summarizes the Company’s stock option activity:
 Stock
Options
Outstanding
Weighted-
average
Exercise
Price
Weighted-
average
Remaining
Contractual
Life (Years)
Aggregate
Intrinsic
Value
(In thousands) (1)
Outstanding at December 31, 2019420,766 $17.71 8.4$15,859 
Granted740,250 $46.46 
Exercised(76,935)$9.43 $5,423 
Cancelled or forfeited(230,745)$30.55 
Outstanding at September 30, 2020853,336 $39.93 9.1$6,056 
Exercisable at September 30, 2020104,266 $11.54 7.2$3,285 
(1)Aggregate intrinsic value represents the difference between the closing stock price of our common stock on September 30, 2020 and the exercise price of outstanding in-the-money options.

The weighted-average grant-date fair value per share of options granted to employees during the three months ended September 30, 2020 was $27.44.
There was $19.0 million of unrecognized stock-based compensation expense related to employees’ awards that is expected to be recognized over a weighted-average period of 3.1 years as of September 30, 2020.
The Company has recorded aggregate stock-based compensation expense related to the issuance of stock option awards and restricted stock awards in the condensed consolidated statements of operations for the three and nine months ended September 30, 2020 and 2019 as follows (in thousands):
 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
(unaudited)(unaudited)
Research and development$344 $154 $714 $396 
General and administrative1,012 124 1,988 520 
Total stock-based compensation$1,356 $278 $2,702 $916 
Stock Options Granted: The Company recorded stock-based compensation expense of $1.4 million and $2.7 million for the three and nine months ended September 30, 2020, respectively and $278 thousand and $734 thousand for the three and nine months ended September 30, 2019, respectively. The fair value of options was estimated at the date of grant using the Black-Scholes valuation model with the following weighted-average assumptions for the three and nine months ended September 30, 2020 and 2019:
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 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
Expected stock price volatility75 %74 %75 %72 %
Expected term of the award (years)6.206.246.206.08
Risk-free interest rate0.34 %1.63 %0.66 %2.20 %
Weighted average exercise price$41.89$38.72$46.46$29.73
Forfeiture rate10.85 %10.00 %10.85 %10.00 %
Restricted Stock Awards: The Company granted 26,213 and 16,213 restricted stock awards (“RSAs”), on June 1, 2018 to our Chief Executive Officer and Chief Operating Officer, respectively. The RSAs vested ratably over a one-year period and had completely vested as of May 31, 2019. No RSAs were outstanding as of September 30, 2020. The fair value of each restricted stock was $10.30 reflecting the closing price of our common stock on the grant date. The Company recorded stock-based compensation expense related to RSAs of zero for the three and nine months ended September 30, 2020 and zero and $182 thousand for the three and nine months ended September 30, 2019, respectively, within general and administrative expenses in the accompanying condensed consolidated statements of operations.
Shares remaining available for grant under the Company’s stock incentive plan were 1,698,412, with a sublimit for incentive stock options of 537,068, at September 30, 2020.
9.    Related Party Transactions
In December 2019, the Company advanced $420 thousand to a member of our management team to cover the personal payroll and income taxes on their taxable income from NSO exercises. This employee repaid the Company in the full amount on January 6, 2020.
10.    Subsequent Events
On October 15, 2020, the Company gave the Landlord notice of its intent to purchase ASTRA for approximately $9.5 million, subject to the parties entering into a commercially reasonable purchase and sale agreement. The Company currently holds approximately $1.5 million on deposit with the Landlord under the existing lease agreement and intends to apply this deposit as a credit against the purchase price at closing. We also expect that the $2.4 million currently recorded as prepaid rent on the balance sheet would be reclassified to property, plant and equipment as part of the book value of the building. As a result of the purchase, the Company will also take assignment of the Lessor's Ground Lease, in accordance with the Purchase Option, of which lease payments are based on annual payments of $82 thousand, and subject to a cumulative 10% escalation clause every 5 years through 2071. The financial statement impact related to the transaction cannot be reasonably estimated as of the date of filing due to the uncertainty of market rates and the timing of the close of purchase.
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ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read together with the unaudited condensed consolidated financial statements and related notes included elsewhere in Item 1 of Part I of this Quarterly Report on Form 10-Q and with the audited financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as filed with the SEC, on March 10, 2020.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or similar expressions and the negatives of those terms. These statements relate to future events or to our future operating or financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements.
Forward-looking statements appearing in a number of places throughout this Quarterly Report on Form 10-Q include, but are not limited to, statements about the following, among other things:
the initiation, timing, progress and results of preclinical and clinical trials for B-VEC (previously “KB103”), KB105, KB301 and any other product candidates, including statements regarding the timing of initiation and completion of studies or trials and related preparatory work, the period during which the results of the trials will become available and our research and development programs;
the impact that the COVID-19 pandemic and measures to prevent its spread may have on our business operations, access to capital, research and development activities, and preclinical and clinical trials for B-VEC, KB105, KB301 and any other product candidates;
the timing, scope or results of regulatory filings and approvals, including timing of final US Food and Drug Administration (“FDA”), marketing and other regulatory approval of our product candidates;
our ability to achieve certain accelerated or orphan drug designations from the FDA;
our estimates regarding the potential market opportunity for B-VEC, KB105, KB301 and any other product candidates;
our research and development programs for our product candidates;
our plans and ability to successfully develop and commercialize our product candidates, including B-VEC, KB105, KB301 and our other product candidates;
our ability to identify and develop new product candidates;
our ability to identify, recruit and retain key personnel;
our commercialization, marketing and manufacturing capabilities and strategy;
the implementation of our business model, strategic plans for our business, product candidates and technology;
the scalability and commercial viability of our proprietary manufacturing methods and processes;
the rate and degree of market acceptance and clinical utility of our product candidates and gene therapy, in general;
our competitive position;
our intellectual property position and our ability to protect and enforce our intellectual property;
our financial performance;
developments and projections relating to our competitors and our industry;
our ability to establish and maintain collaborations or obtain additional funding;
our estimates regarding expenses, future revenue, capital requirements and needs for or ability to obtain additional financing;
our ability to successfully resolve any intellectual property or other claims that may be brought against us;
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any statements regarding compliance with the listing standards of The NASDAQ Capital Market;
the impact of laws and regulations; and
any statements regarding economic conditions, including statements related to the economic fallout from the COVID-19 pandemic and the impact on our business, or performance and any statement of assumptions underlying any of the foregoing.
Forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk Factors” elsewhere in this Form 10-Q and in other filings we make with the SEC from time to time. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Quarterly Report. You should read this Quarterly Report completely and with the understanding that our actual future results may be materially different from what we expect.
Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
Throughout this Form 10-Q, unless the context requires otherwise, all references to “Krystal,” “the Company,” we,” “our,” “us” or similar terms refer to Krystal Biotech, Inc., together with its consolidated subsidiaries.
Overview
We are a clinical stage gene therapy company developing a new class of transformative medicines to treat diseases caused by gene or protein dysfunction or absence. Using our patented platform that is based on engineered HSV-1, we create vectors that encode functional proteins. Our vector is designed to be specifically and efficiently delivered to the target cell in an outpatient setting, via topical or intradermal routes of administration, where the cell’s own machinery transcribes and translates the encoded protein, restoring or augmenting protein function to treat or prevent disease.
Presently, we have two product candidates in the clinic to treat rare skin diseases. We announced initiation of a Phase 3 pivotal trial on our most advanced product candidate, B-VEC, to treat dystrophic epidermolysis bullosa (“DEB”) on July 28, 2020.  Details of the pivotal study can be found at www.clinicaltrials.gov under NCT identifier NCT04491604. We expect to complete enrollment in this study in early 2021 and anticipate having top-line data from this trial, as well as filing of a Biologics License Application ("BLA") with the U.S. Food and Drug Administration ("FDA"), in 2021.  We initiated the Phase 2 portion of our Phase 1/2 study on our second product candidate, KB105, to treat autosomal recessive congenital ichthyosis (“ARCI”) on August 4, 2020 following a successful recent completion of a Phase 1 trial in adults.  Details of the Phase 2 study can be found at www.clinicaltrials.gov under NCT identifier NCT04047732. Nothing included on these websites shall be deemed incorporated by reference into this Quarterly Report on Form 10-Q.
We are also applying our HSV-1 platform towards the development of therapies to treat aesthetic skin conditions. We announced initiation of the Phase 1 clinical study on our third product candidate, KB301, to treat wrinkles and acne scars in on August 25, 2020. Details of the Phase 1 study can be found at www.clinicaltrials.gov under NCT identifier NCT04540900. During the third quarter of 2020, the United States Patent Office ("USPTO") has granted U.S. Patent No. 10,786,438 which covers pharmaceutical compositions comprising HSV vectors encoding one or more cosmetic proteins, as well as methods of their use for improving skin condition, quality, and/or appearance.
Recognizing the breadth and potential transformative power of our HSV-1 vector platform, we have expanded the scope of our product development beyond skin and have begun preclinical efforts in pulmonary diseases. The large payload capacity, robust tropism to epithelial cells (including human airway epithelia), immune-evasive properties, and manufacturing scalability of our HSV-based vector platform gives us an advantage over other viral vector therapies for pulmonary indications.  Our preclinical efforts to date have led to the development of a novel candidate, KB407, for the treatment of Cystic Fibrosis (“CF”), which has been shown to successfully transduce human CF patient-derived epithelial cells and deliver functional cystic fibrosis transmembrane conductance regulator (“CFTR”) in vitro in 2D and 3D organotypic systems, and is amendable to non-invasive inhaled administration in vivo, as indicated by successful delivery to the lungs through the use of a clinically relevant nebulizer in small animal models. Successful delivery and distribution throughout the lung was also observed in a non-human primate study. Based on feedback from regulatory agencies, Investigational New Drug (“IND”) enabling safety and efficacy studies,
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including an additional safety study in non-human primates, are underway, and IND filing for KB407 is anticipated in 1H 2021. During the third quarter of 2020, we received a Notice of Allowance for our patent application covering methods of using KB407 for the treatment of Cystic fibrosis and other diseases causing progressive lung destruction, which is expected to issue as US Pat. No. 10,829,529 on November 10, 2020. Additional pulmonary diseases are also being evaluated.
We believe that gene therapy companies should control their manufacturing destiny and that having in-house current good manufacturing practices (“cGMP”) facilities allow a gene therapy company to maintain better quality control, shorter lead times, lower costs and better command over intellectual property. Last year, we completed the construction of our own commercial scale cGMP-compliant manufacturing facility, ANCORIS, to enhance supply chain control, increase supply capacity for clinical trials and ensure commercial demand is met in the event that B-VEC and our other product candidates receive marketing approval.  The clinical material for the pivotal trial has been produced at ANCORIS and we expect to produce initial commercial launch material of B-VEC will be produced at the same facility. Earlier this year, we announced the ground-breaking of our second commercial gene therapy facility in the Pittsburgh, Pennsylvania area. The ASTRA facility is being designed as a state-of-the-art cGMP manufacturing facility that, beyond providing for expansion of Krystal’s current production platform, will allow the in-house incorporation of raw material preparation, excipient manufacturing, testing, packaging, labeling and distribution, fully-integrating all components of the supply chain from starting materials to patient experience. We anticipate that the ASTRA facility will initially be used as a commercial back-up facility for B-VEC in the U.S. and supply ex-U.S. markets. Eventually, the ASTRA facility will be expanded to produce investigational and commercial material for our pipeline products. We have recently expanded our facility design to include additional production, quality control labs for testing and release of product, and administrative and training spaces. We expect the 150,000 square foot facility to be completed and validated in 2022.
We have a rapidly expanding portfolio of issued patents in both the United States and foreign jurisdictions and believe that the granting of these patents, which are entirely owned by the Company, protects our core platform and products based thereupon, affording us the freedom to use our patented platform for the development of novel therapeutics for multiple indications. We continue to advance our IP portfolio actively through the filing of new patent applications, divisionals, and continuations relating to our technologies as we deem appropriate. In addition to our patents, we rely on trade secrets and know-how to develop and maintain our competitive position. However, trade secrets can be difficult to protect. We seek to protect our proprietary technology and processes, and obtain and maintain ownership of certain technologies, in part, through confidentiality agreements and intellectual property assignment agreements with our employees, consultants and commercial partners. We also seek to preserve the integrity and confidentiality of our data, trade secrets, and know-how, including by implementing measures intended to maintain the physical and electronic security of our research and manufacturing facilities, as well as our information technology systems.
Our desire is to bring transformative medicines, using our platform, to patients suffering from debilitating diseases and conditions. A brief overview of our pipeline follows below.
Pipeline
Beremagene Geperpavec (“B-VEC”) for the treatment of Dystrophic Epidermolysis Bullosa
Our lead product candidate, B-VEC, is a topical gene therapy to treat DEB, a rare and severe monogenic skin disease for which there is currently no approved treatment.  DEB affects the skin and mucosal tissues and is caused by one or more mutations in a gene called COL7A1, which is responsible for the formation of the protein type VII collagen, or COL7, that forms anchoring fibrils that bind the dermis, or inner layer of the skin, to the epidermis, or outer layer of the skin. In DEB patients, the genetic defect in COL7A1 results in loss or malfunctioning of these anchoring fibrils, leading to extremely fragile skin that blisters and tears from minor friction or trauma. Those who are born with DEB are sometimes called “butterfly children,” because their skin is likened to be as fragile as the wings of a butterfly. DEB patients may suffer from open wounds, skin infections, fusion of fingers and toes and gastrointestinal tract problems throughout their lifetime, and may eventually develop squamous cell carcinoma, a potentially fatal condition. 
On July 28, 2020, we announced initiation of our Phase 3 pivotal study known as GEM-3. The trial is a randomized, double-blind, intra patient placebo-controlled multicenter study designed to evaluate the efficacy and safety of B-VEC for patients suffering from both recessive and dominant forms of DEB. The trial aims to enroll approximately thirty (30) participants with DEB, aged 6 months or older at time of consent. Investigator identified wound pairs, up to three in each patient, are deemed the “primary” wounds. These primary wounds will be treated once weekly for six months with either B-VEC or placebo, until wound closure. If a wound were to re-open at any point during the study, weekly dosage will resume until closure. The dose administered to each wound is dependent on the size of the wound and ranges from 4x108 to 1.2x109 PFU per wound. A maximum vector dose per patient per week has been defined on the basis of preclinical and clinical safety data. In the event that the maximum dose per patient has not been reached based on dosing of the primary wounds, the study
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investigators and patients will have the opportunity to select additional “secondary” wounds across which the remaining weekly dose may be applied.
The Primary Outcome Measure is complete wound healing determined by the Investigator, as compared to baseline in B-VEC treated wounds versus placebo treated wounds at Weeks 20, 22 and 24. Secondary endpoints to be evaluated in the study include complete wound healing at Weeks 8, 10 and 12; the mean change in pain severity (using either a VAS or FLACC-R Scale) per primary wound site associated with wound dressing; the proportion of primary wound sites with ≥75% healing assessed via Canfield photography. Additional exploratory measures include relative time to wound closure from baseline, duration of wound closure, mean reduction in wound surface area in B-VEC treated versus placebo treated wounds, mean change in Quality of Life in addition to Skindex score as compared to baseline at Week 24. Throughout the study, participants will complete questionnaires, have images captured of their study wounds, undergo physical exams, have vital signs and safety labs monitored. Additional details on the study protocol are available at www.clinicaltrials.gov under NCT identifier NCT04491604. Nothing included on this website shall be deemed incorporated by reference into this Quarterly Report on Form 10-Q. We expect to complete enrollment in this study in early 2021 and anticipate having top-line data from this trial as well as filing of a BLA with the FDA in 2021. We are aligned with the European Medicines Agency (“EMA”) on a pivotal trial design and we believe that data from GEM-3 will form the basis of a Marketing Authorisation Application (“MAA”) filing, shortly after the BLA.
In May of 2020, complete Phase 1/2 data from the GEM-1 and GEM-2 studies was presented at the Society of Investigational Dermatology (“SID”) meeting. The Phase 1 portion of the trial commenced in May 2018 at Stanford University, and we announced positive interim results from this clinical study on two patients in October 2018.  The Phase 2 portion of the trial commenced in December 2018 at Stanford University, and we announced positive interim results from this clinical study on June 24, 2019.
The FDA and the EMA have each granted B-VEC orphan drug designation for the treatment of DEB, and the FDA has granted B-VEC fast track designation and rare pediatric designation for the treatment of DEB. In addition, in 2019, the FDA granted Regenerative Medicine Advanced Therapy (“RMAT”) to B-VEC for the treatment of DEB and the EMA granted PRIority MEdicines, or PRIME, eligibility for B-VEC to treat DEB. The PRIME designation is awarded by the EMA to promising medicines that target an unmet medical need.
KB105 for the treatment of Autosomal Recessive Congenital Ichthyosis
Our second pipeline candidate, KB105, delivers functional human transglutaminase 1 (“TGM1”), genes using our gene therapy platform to patients with TGM1-deficient ARCI. ARCI is a life-long, severe monogenic skin disease. While a number of genetic mutations have been associated with the development of ARCI, the most common cause of ARCI is an inactivating mutation in the TGM1 gene encoding the enzyme transglutaminase-1, a protein that is essential for the proper formation of the skin barrier. Mutations in the TGM1 gene, and the subsequent disruption to the epidermal barrier, leads to pronounced dehydration and trans-epidermal exposure to unwanted toxins and surface microorganisms, greatly increasing the risk of infection and sepsis. Transglutaminase-1 deficiency is associated with increased mortality in the neonatal period and has a dramatic impact on quality of life. There are currently no treatments targeting molecular correction of this disease.
In August 2020, we initiated the second phase of our Phase 1/2 clinical trial of KB105 to treat ARCI. We have enrolled one patient in whom four rectangular 100cm2 (4-inch x 4-inch) areas of skin were selected as Target Areas.  Two sites will receive an initial and a repeat dose of 4.0 x 10^9 PFU/Treated Area (TA) while the other two sites will receive 1.0 x 10^10 PFU/ TA. The primary objective of the study is to assess the improvement in localized severity of disease through an Investigator’s Global Assessment (“IGA”) of disease severity in the treatment area and TGM1 expression and activity and to evaluate safety through the incidence of adverse events associated with KB105 post administration. Additional details on the study protocol are available at www.clinicaltrials.gov under NCT identifier NCT04047732. Nothing on this website shall be deemed incorporated into this Quarterly Report on Form 10-Q.
In May 2020, clinical data from the first phase of the Phase 1/2 study which enrolled adult patients were presented at the SID meeting. Additional details on the interim results are available at http://ir.krystalbio.com/index.php/news-releases/news-release-details/krystal-biotech-announces-positive-interim-results-phase-12. We announced that the study was initiated on September 4, 2019. Nothing on this website shall be deemed incorporated into this Quarterly Report on Form 10-Q.  
KB301 for the treatment of aesthetic skin conditions
The skin is largely composed of collagen-rich connective tissue, with dermal collagen, composed primarily of types 1 and 3 collagen fibrils, representing >90% (dry weight) of human skin. The characteristics of skin aging are largely due to aberrant collagen homeostasis, including reduced collagen biosynthesis, increased collagen fibril fragmentation, and progressive loss of dermal collagen culminating in a net collagen deficiency, resulting from both intrinsic (e.g., passage of time,
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genetics) and extrinsic (e.g., chronic light exposure, pollution) pressures. The goal of skin biorejuvenation is, in part, to enhance the synthesis of human dermal collagens (i.e., neocollagenesis), thereby correcting the molecular defect underlying the aged phenotype. We believe that our approach of directed expression of full-length human type 3 collagen via intradermal application of KB301 provides a unique and straightforward approach to restoring collagen homeostasis, and by extension, reconstructing an optimal physiologic environment in the skin to treat wrinkles and other superficial skin defects.
We initiated the Phase 1 safety clinical trial for the treatment of wrinkles and acne scars on August 25, 2020. On October 8, 2020, we announced presentation of preclincial data supporting the ongoing development of KB301 at the American Society for Dermatologic Surgery ("ASDS") 2020 Virtual Meeting.
KB104 for the treatment of Netherton Syndrome
KB104 is designed to deliver functional Serine Protease Inhibitor Kazal-type 5 (“SPINK5”), genes using our gene therapy platform to patients suffering from Netherton Syndrome, which is a debilitating monogenic autosomal recessive skin disorder that causes defective keratinization, severe skin barrier defects, and recurrent infections. Severe Netherton Syndrome symptoms in infants are associated with failure to thrive, hypernatremic dehydration secondary to excess fluid loss, delayed growth, short stature, and recurrent infections. Clinically, Netherton Syndrome is characterized by congenital ichthyosiform erythroderma, hair shaft defects, recurrent infections, and a defective skin barrier. A predisposition to allergies, asthma, and eczema is also characteristic of Netherton Syndrome. Ultimately, those afflicted by Netherton Syndrome often experience chronic skin inflammation, severe dehydration, and stunted growth.
KB407 for the treatment of Cystic Fibrosis
We are developing KB407 as a non-invasive inhaled gene therapy product for the treatment of CF and are currently in the preclinical phase with plans for a clinical study for KB407 in 1H 2021. The FDA granted Orphan Drug Designation to KB407 on August 17, 2020, and Rare Pediatric Designation on September 28, 2020.
CF, the most common inherited genetic disorder in the United States, is caused by mutations in the gene encoding CFTR. Lack of functional CFTR in secretory airway epithelia results in defective Cl-, bicarbonate, and thiocyanate secretion, coupled with enhanced Na+ absorption and mucus production, leading to dehydration and acidification of the airway surface liquid. CF is characterized by recurrent chest infections, increased airway secretions, and eventually, respiratory failure. While CF comprises a multiorgan pathology affecting the upper and lower airways, gastrointestinal and reproductive tracts, and the endocrine system, the primary cause of morbidity and mortality in CF is due to progressive lung destruction. According to the US Cystic Fibrosis Foundation (“CFF”), the median age at death for patients with CF in the United States was 30.8 years in 2018. Currently approved CFTR modulating therapies are limited to patients with specific genetic mutations and there is a significant unmet medical need for patients with CF who have genetic mutations non-amenable to currently approved CFTR small molecule “modulators”. According to the CFF, approximately 30,000 patients in the United States and more than 70,000 patients worldwide are living with CF, and approximately 850 new cases of CF were diagnosed in 2018.  
Other
In December 2019, COVID-19 was first reported in Wuhan, China and in March 2020, a global pandemic was declared by the World Health Organization. In an effort to slow the spread of the virus, certain governments, including the Commonwealth of Pennsylvania where the Company’s primary offices, laboratory and manufacturing spaces are located, enacted stay-at-home orders, and sweeping restrictions to travel were initiated by corporations and governments. Although these restrictions have been lifted in some areas, it is not known at this time whether they will be reestablished or the extent to which the Company will be impacted. The degree of COVID-19’s effect on the Company’s clinical, operational and financial performance will depend on future developments, including additional protective measures that may be implemented by governmental authorities or the Company to protect its employees, or by investigators, caregivers or patients to minimize exposure, all of which are uncertain and difficult to predict. While to date the impact of COVID-19 on our business and clinical trials has been minimal, we will continue to assess the potential impact of the COVID-19 pandemic on our business and operations, including our supply chain and preclinical and clinical trial activities.
At September 30, 2020, our cash, cash equivalents and short-term investments balance was approximately $286.4 million. Since operations began, we have incurred operating losses. Our net losses were $9.6 million and $21.8 million for the three and nine months ended September 30, 2020 and $4.3 million and $13.7 million for the three and nine months ended September 30, 2019, respectively. At September 30, 2020, we had an accumulated deficit of $60.8 million. We will need to generate significant revenue to achieve profitability, and we may never generate revenue or enough revenue to achieve profitability. We expect to incur significant expenses and increasing operating losses for the foreseeable future. Our net losses
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may fluctuate significantly from quarter to quarter and year to year. We expect our costs will continue to increase significantly as a result of our current and planned business activities, such as:
conducting our Phase 3 clinical trial for B-VEC, Phase 1/2 clinical trial for KB105, and Phase 1 clinical trial for KB301;
continued research and development-related activities for the advancement of our pipeline product candidates into clinical development, such as KB104 and KB407;
construction of our cGMP manufacturing facility, ASTRA, and related completion and validation costs;
manufacturing of our clinical trial materials;
pursuing regulatory approval for our product candidates;
adding personnel to support our administrative, product development and commercialization efforts; and
activities leading up to the commercial launch of B-VEC in multiple markets.
Costs related to clinical trials can be unpredictable and therefore there can be no guarantee that we will have sufficient capital to fund our planned preclinical studies for our pipeline product candidates, or our operations. Our funds may not be sufficient to enable us to seek marketing approval for or to commercially launch B-VEC, KB105, KB301 or any other product candidate. Accordingly, to obtain marketing approval for and to commercialize this or any other product candidates, we may be required to obtain further funding through public or private equity offerings, debt financings, collaboration and licensing arrangements or other sources. Adequate additional financing may not be available to us on acceptable terms, if at all. Our failure to raise capital when needed could have a negative effect on our financial condition and our ability to pursue our planned business strategy.
Financial Overview
Revenue
We currently have no approved products for commercial marketing or sale and have not generated any revenue from the sale of products or other sources to date. In the future, we may generate revenue from product sales, royalties on product sales, or license fees, milestones, or other upfront payments if we enter into any collaborations or license agreements. We expect that our future revenue will fluctuate from quarter to quarter for many reasons, including the uncertain timing and amount of any such payments and sales.
Research and Development Expenses
Research and development expenses consist primarily of costs incurred to advance our preclinical and clinical candidates, which include:
expenses incurred under agreements with contract manufacturing organizations, consultants and other vendors that conduct our preclinical activities;
costs of acquiring, developing and manufacturing clinical trial materials and lab supplies;
facility costs, depreciation and other expenses, which include direct expenses for rent and maintenance of facilities and other supplies; and
payroll related expenses, including stock-based compensation expense.
We expense internal research and development costs to operations as incurred. We expense third party costs for research and development activities, such as the manufacturing of preclinical and clinical materials, based on an evaluation of the progress to completion of specific tasks such as manufacturing of drug substance, fill/finish and stability testing, which is provided to us by our vendors.
We expect our research and development expenses will increase as we continue the manufacturing of preclinical and clinical materials and manage the clinical trials of, and seek regulatory approval for, our product candidates and expand our product portfolio. In the near term, we expect that our research and development expenses will increase as we begin our pivotal Phase 3 clinical trial for B-VEC, conduct our ongoing Phase 1/2 clinical trial for KB105, and incur preclinical expenses for our other product candidates. Due to the numerous risks and uncertainties associated with product development, we cannot determine with certainty the duration, costs and timing of our clinical trials, and, as a result, the actual costs to complete our clinical trials may exceed the expected costs.
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General and Administrative Expenses
General and administrative expenses consist principally of professional fees associated with corporate and intellectual property-related legal expenses, consulting and accounting services, facility-related costs and expenses associated with obtaining and maintaining patents. Other general and administrative costs include stock-based compensation and travel expenses.
We anticipate that our general and administrative expenses will increase in the future to support the continued research and development of our product candidates and to operate as a public company. These increases will likely include increased costs for insurance, costs related to the hiring of additional personnel and payments to outside consultants, lawyers and accountants, among other expenses. Additionally, if and when we believe a regulatory approval of our first product candidate appears likely, we anticipate that we will increase our salary and personnel costs and other expenses as a result of our preparation for commercial operations.
Interest Income  
Interest income consists primarily of income earned from our cash, cash equivalents and investments.
Critical Accounting Policies, Significant Judgments and Estimates
There have been no significant changes during the three and nine months ended September 30, 2020 to our critical accounting policies, significant judgments and estimates as disclosed in our management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2019.
Results of Operations
Three Months Ended September 30, 2020 and 2019
 
Three Months Ended September 30,
 
 20202019Change
(In thousands)(unaudited) 
Expenses   
Research and development$5,100 $3,885 $1,215 
General and administrative4,580 1,457 3,123 
Total operating expenses9,680 5,342 4,338 
Loss from operations(9,680)(5,342)(4,338)
Other Income 
Interest and other income, net70 1,070 (1,000)
Net loss$(9,610)$(4,272)$(5,338)
Research and Development Expenses 
Research and development expenses increased $1.2 million in the three months ended September 30, 2020 compared to the three months ended September 30, 2019. Higher research and development expenses were due to an increase in outsourcing research and development activities of $352 thousand, lab supplies of $187 thousand, payroll related expenses of $526 thousand which is primarily driven by an increase in headcount to support overall growth and includes a $190 thousand increase in stock-based compensation, and other research and development expenses of $150 thousand.
General and Administrative Expenses
General and administrative expenses increased $3.1 million in the three months ended September 30, 2020 as compared to the three months ended September 30, 2019. Higher general and administrative spending was due largely to increases in payroll related expenses of approximately $1.6 million which is primarily driven by an increase in headcount to support overall growth and includes an $888 thousand increase in stock-based compensation, market research related expenses of $611 thousand, legal and professional fees of $631 thousand and other administrative expenses of $298 thousand.
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Interest and Other Income
Interest and other income for the three months ended September 30, 2020 and 2019 was $70 thousand and $1.1 million, respectively and consisted of interest and dividend income earned from our cash, cash equivalents and investments. This decrease was driven by a decline in market interest rates.
Nine Months Ended September 30, 2020 and 2019
 Nine Months Ended
September 30,
 
 20202019Change
(In thousands)(unaudited) 
Expenses   
Research and development$12,264 $11,267 $997 
General and administrative10,315 4,660 5,655 
Total operating expenses22,579 15,927 6,652 
Loss from operations(22,579)(15,927)(6,652)
Other Income 
Interest and other income, net795 2,196 (1,401)
Net loss$(21,784)$(13,731)$(8,053)
Research and Development Expenses
Research and development expenses increased $997 thousand in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. Higher research and development expenses were due largely to an increase in payroll related expenses of approximately $1.4 million which is primarily driven by an increase in headcount to support overall growth and includes a $318 thousand increase in stock-based compensation and a net increase in other research and development expense of $311 thousand offset by an decrease in outsourcing research and development activities of $681 thousand.
General and Administrative Expenses
General and administrative expenses increased $5.7 million in the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019. Higher general and administrative spending was due largely to increases in payroll related expenses of approximately $3.1 million which is primarily driven by an increase in headcount to support overall growth and includes an approximately $1.5 million increase in stock-based compensation, market research related expenses of approximately $1.1 million, legal and professional fees of $748 thousand, insurance expense of $552 thousand and other administrative expenses of $177 thousand.
Interest and Other Income
Interest and other income for the nine months ended September 30, 2020 and 2019 was $795 thousand and $2.2 million, respectively and consisted of interest and dividend income earned from our cash, cash equivalents and investments. This decrease was driven by a decline in market interest rates.
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Liquidity and Capital Resources
Overview
As of September 30, 2020, the Company had an accumulated deficit of $60.8 million. With the net proceeds raised from its public and private securities offerings, including the public offering completed on May 21, 2020, the Company believes that its cash, cash equivalents and short-term investments of approximately $286.4 million as of September 30, 2020 will be sufficient to allow the Company to fund its operations for at least 12 months from the filing date of this Form 10-Q. As the Company continues to incur losses, a transition to profitability is dependent upon the successful development, approval and commercialization of its product candidates and the achievement of a level of revenues adequate to support the Company’s cost structure. The Company may never achieve profitability, and unless and until it does, the Company will continue to need to raise additional capital. Management intends to fund future operations through the sale of equity and debt financings and may also seek additional capital through arrangements with strategic partners. There can be no assurances that additional funding will be available on terms acceptable to the Company, if at all. In addition, the COVID-19 pandemic may negatively impact our operations, including possible effects on its financial condition, ability to access the capital markets on attractive terms or at all, liquidity, operations, suppliers, industry, and workforce. The Company will continue to evaluate the impact that these events could have on the operations, financial position, and the results of operations and cash flows during fiscal year 2020 and beyond.
Operating Capital Requirements
We expect our primary use of capital to continue to be for compensation and related expenses, manufacturing costs for preclinical and clinical materials, third party clinical trial research and development services, laboratory and related supplies, clinical costs, legal and other regulatory expenses and general overhead costs. We believe that our available funds will be sufficient to enable us to complete our pivotal Phase 3 clinical trials for B-VEC, to continue our Phase 1/2 clinical trials for KB105, to complete our Phase 1 clinical trials for KB301, as well as to continue construction and validation related activities associated with our cGMP manufacturing facility, ASTRA.
We have based our projections of operating capital requirements on assumptions that may prove to be incorrect and we may use all of our available capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are unable to estimate the exact amount of our operating capital requirements. Our future funding requirements will depend on many factors, including, but not limited to:
the timeline and cost of our pivotal Phase 3 clinical trials for B-VEC;
the progress, timing, results and costs of our ongoing Phase 1/2 clinical trials for KB105;
the progress, results and costs of our Phase 1 clinical trials for KB301;
the progress, timing and costs of manufacturing of B-VEC for our pivotal Phase 3 clinical trials;
the continued development and the filing on an IND application for future product candidates;
the initiation, scope, progress, timing, costs and results of drug discovery, laboratory testing, manufacturing, preclinical studies and clinical trials for any other product candidates that we may pursue in the future, if any;
the costs of maintaining our own commercial-scale cGMP manufacturing facility;
the outcome, timing and costs of seeking regulatory approvals;
the costs associated with the manufacturing process development and evaluation of third-party manufacturers;
the costs of future activities, including product sales, medical affairs, marketing, manufacturing and distribution, in the event we receive marketing approval for B-VEC, KB105, KB301 or any other product candidates we may develop;
the extent to which the costs of our product candidates, if approved, will be paid by health maintenance, managed care, pharmacy benefit and similar healthcare management organizations, or will be reimbursed by government authorities, private health coverage insurers and other third-party payors;
the costs of commercialization activities for B-VEC, KB105, KB301 and other product candidates if we receive marketing approval for B-VEC, KB105, KB301 or any other product candidates we may develop, including the costs and timing of establishing product sales, medical affairs, marketing, distribution and manufacturing capabilities;
subject to receipt of marketing approval, if any, revenue received from commercial sale of B-VEC, KB105, KB301 or our other product candidates;
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the terms and timing of any future collaborations, licensing, consulting or other arrangements that we may establish;
the amount and timing of any payments we may be required to make, or that we may receive, in connection with the licensing, filing, prosecution, maintenance, defense and enforcement of any patents or other intellectual property rights, including milestone and royalty payments and patent prosecution fees that we are obligated to pay pursuant to our license agreements;
our current license agreements remaining in effect and our achievement of milestones under those agreements;
our ability to establish and maintain collaborations and licenses on favorable terms, if at all; and
the extent to which we acquire or in-license other product candidates and technologies.
We expect that we may need to obtain substantial additional funding in order to receive regulatory approval and to commercialize B-VEC or any other product candidates, including KB105. To the extent that we raise additional capital through the sale of common stock, convertible securities or other equity securities, the ownership interests of our existing stockholders may be materially diluted and the terms of these securities could include liquidation or other preferences that could adversely affect the rights of our existing stockholders. In addition, debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, that could adversely affect our ability to conduct our business. If we are unable to raise capital when needed or on attractive terms, we could be forced to significantly delay, scale back or discontinue the development or commercialization of B-VEC, KB105, KB301 or our other product candidates, seek collaborators at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available, and relinquish or license, potentially on unfavorable terms, our rights to B-VEC, KB105, KB301 or our other product candidates that we otherwise would seek to develop or commercialize ourselves.  
Sources and Uses of Cash
The following table summarizes our sources and uses of cash (in thousands):
 Nine months Ended
September 30,
 20202019
 (unaudited)
Net cash used in operating activities$(18,059)$(11,690)
Net cash used in investing activities(4,964)(4,400)
Net cash provided by financing activities117,878 107,226 
Net increase in cash$94,855 $91,136 
Operating Activities
Net cash used in operating activities for the nine months ended September 30, 2020 was $18.1 million and consisted primarily of a net loss of $21.8 million adjusted for non-cash items primarily of depreciation and amortization and stock-based compensation expense of $4.1 million, and cash used by increases in net operating assets of approximately $371 thousand.
Net cash used in operating activities for the nine months ended September 30, 2019 was $11.7 million and consisted primarily of a net loss of $13.7 million adjusted for non-cash items of depreciation and amortization and stock-based compensation expense of approximately $1.7 million, and cash provided by decreases in net operating liabilities of $318 thousand.
Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2020 was $5.0 million and consisted primarily of purchases of $3.2 million of short-term available-for-sale investment securities, and expenditures of $7.6 million on the build-out of our ASTRA facility, leasehold improvement of new office space, and purchases of computer and laboratory equipment, partially offset by proceeds of $5.9 million received from the maturities of short-term investments.
Net cash used in investing activities for the nine months ended September 30, 2019 was $4.4 million and consisted primarily of purchases of $6.9 million of short-term available-for-sale investment securities, and expenditures of $4.1 million on the build-out of our new cGMP facilities and purchases of computer and laboratory equipment, partially offset by proceeds of $6.6 million received from the maturities of short-term investments.
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Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2020 was $117.9 million and was primarily from proceeds from our public offering on May 21, 2020 of 2,275,000 shares of our common stock to the public at $55.00 per share. Net proceeds to the Company from the offering were $117.2 million after deducting underwriting discounts and commissions of approximately $7.5 million and other offering expenses of approximately $463 thousand.  
Net cash provided by financing activities for the nine months ended September 30, 2019 was $107.2 million and was primarily from proceeds from our public offering in June 2019 of 2,500,000 shares of our common stock at a price to the public of $40.00 per share. Net proceeds to the Company from the offering were $93.8 million after deducting underwriting discounts and commissions of approximately $6.0 million and other offering expenses of approximately $190 thousand. On July 3, 2019, the underwriters exercised their option to purchase an additional 353,946 shares of common stock at $40.00 per share for additional net proceeds of $13.3 million after deducting underwriting discounts and commissions of approximately $849 thousand.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as defined in the rules and regulations of the SEC.
Contractual Obligations
There have been no material changes to our contractual obligations as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019 other than as described in Note 6 “Commitments and Contingencies” of our condensed consolidated financial statements on this Form 10-Q.
JOBS Act Accounting Election
We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (“the JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Qualitative and Quantitative Disclosures About Market Risk
We had cash, cash equivalents and short-term investments of $286.4 million at September 30, 2020, which consist primarily of money market, bank deposits, U.S. Treasury bills and certificates of deposit. The investments in these financial instruments are made in accordance with an investment policy which specifies the categories, allocations and ratings of securities we may consider for investment. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive without significantly increasing risk. Some of the financial instruments in which we invest could be subject to market risk. This means that a change in prevailing interest rates may cause the value of the instruments to fluctuate. For example, if we purchase a security that was issued with a fixed interest rate and the prevailing interest rate later rises, the value of that security will likely decline. To minimize this risk, we intend to maintain a portfolio which may include cash, cash equivalents and investment securities available-for-sale in a variety of securities which may include money market funds, government and non-government debt securities and commercial paper, all with various maturity dates. Based on our current investment portfolio, we do not believe that our results of operations or our financial position would be materially affected by an immediate change of 10% in interest rates.
We do not hold or issue derivatives, derivative commodity instruments or other financial instruments for speculative trading purposes. Further, we do not believe our cash, cash equivalents and short-term investments have significant risk of default or illiquidity. While we believe our cash, cash equivalents and short-term investments do not contain excessive risk, we cannot provide absolute assurance that any investments we make in the future will not be subject to adverse changes in market value. Our cash, cash equivalents and short-term investments are recorded at fair value.

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ITEM 4.    CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and our Chief Accounting Officer, with the participation of other members of the Company’s management, have evaluated the effectiveness of the Company’s “disclosure controls and procedures” (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of the end of the period covered by this quarterly report, and our Chief Executive Officer and our Chief Accounting Officer have concluded that our disclosure controls and procedures are effective based on their evaluation of these controls and procedures as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the quarter ended September 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting despite the fact that some of our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the impact of COVID-19 on our internal controls to minimize the impact on their design and operating effectiveness.
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PART II. OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS
On May 1, 2020, a complaint was filed against us in the United States District Court for the Western District of Pennsylvania by PeriphaGen Inc., which also named our chief executive officer and chief operating officer, Krish Krishnan and Suma Krishnan, respectively. The complaint alleges breach of contract and misappropriation of trade secrets, which secrets the plaintiff asserts were used to develop our product candidates, including the vector backbones, and our STAR-D platform. We answered the complaint on June 26, 2020 by denying the allegations and brought a counterclaim asking the court to declare that we did not misappropriate PeriphaGen’s trade secrets or confidential information, and to further declare that we are the rightful and sole owner of our product candidates and STAR-D platform. In addition, we filed a third-party complaint against two principals of PeriphaGen, James Wechuck and David Krisky, alleging breach of contract and seeking contribution and indemnification from them in the event PeriphaGen is awarded damages. On July 29, 2020, PeriphaGen filed its response to our answer and counterclaim, denying the allegations in the counterclaim. On the same day, the Messrs. Wechuck and Krisky filed a motion to dismiss the third-party complaint on various grounds, and we have opposed the motion. Discovery in the case has commenced and is expected to continue into the first half of 2021.
While we are unable to provide any assurances as to the ultimate outcome of the case, we believe the allegations in the complaint are without merit, and we intend to vigorously defend against them. We are currently unable to estimate the costs and timing of any litigation, including any potential damages if PeriphaGen were to prevail on its claims.
Item 1A. Risk Factors.
Risks Related to Our Financial Position and Need for Additional Capital
We have incurred net losses since inception. We expect to incur losses for the foreseeable future and may never achieve or maintain profitability.
Since inception, we have incurred recurring losses and negative cash flows from operations and, at September 30, 2020, we had an accumulated deficit of $60.8 million. Our ability to achieve profitability depends on our ability to successfully complete the development of, and obtain the regulatory approvals necessary to commercialize, B-VEC, KB105, and KB301 and additional product candidates that we may pursue in the future. We do not anticipate generating revenues from product sales for the next year, if ever. We have devoted substantially all our efforts to date to research and development of our gene therapy product candidates, B-VEC, KB105, and KB301 as well as to building out our infrastructure. We expect that it could be several years, if ever, before we have a commercialized product candidate. We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. The net losses we incur may fluctuate significantly from quarter to quarter. We anticipate that our expenses will increase substantially if, and as, we:
continue our research and the clinical development of B-VEC, KB105, and KB301, including our current clinical trials and planned future trials;
initiate additional clinical trials and preclinical studies for any additional product candidates that we may pursue in the future;  
prepare our BLA, MAA, and approvals in certain other countries for B-VEC, KB105, and KB301;
ramp-up our in-house commercial-scale cGMP manufacturing facility;
manufacture material for clinical trials or potential commercial sales;
further develop our gene therapy product candidate portfolio;
establish a sales, marketing and distribution infrastructure to commercialize any product candidate for which we may obtain marketing approval;
develop, maintain, expand and protect our intellectual property portfolio;
acquire or in-license other product candidates and technologies; and
seek marketing approval for B-VEC, KB105, KB301 and additional product candidates in the European Union (“EU”) and in other key geographies.
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To become and remain profitable, we must develop and eventually commercialize one or more product candidates with significant market potential. This will require us to be successful in a range of challenging activities, including completing the clinical trials for B-VEC, KB105, and KB301, developing and validating commercial scale manufacturing processes, obtaining marketing approval for this product candidate, manufacturing, marketing and selling any future product candidates for which we may obtain marketing approval and satisfying any post-marketing requirements. If we were required to discontinue development of either B-VEC, KB105, or KB301, if B-VEC, KB105, or KB301 do not receive regulatory approval, if we do not obtain our targeted indications for B-VEC, KB105, or KB301, or if B-VEC, KB105, or KB301 fails to achieve sufficient market acceptance for any indication, we could be delayed by many years in our ability to achieve profitability, if ever, and would materially adversely affect our business prospects and financial condition. Moreover, if we decide to leverage any success with our B-VEC, KB105, or KB301 product candidates to develop other product opportunities, we may not be successful in such efforts. In any such event, our business will be materially adversely affected.
We currently only have three product candidates, B-VEC, KB105, and KB301, in clinical trials and we may never develop, acquire or in-license additional product candidates. We may never succeed in any or all these activities and, even if we do, we may never generate revenues that are significant or large enough to achieve profitability. If we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of our company and could impair our ability to raise capital, maintain our research and development efforts, expand our business or continue our operations. A decline in the value of our company also could cause you to lose all or part of your investment.
Because of the numerous risks and uncertainties associated with pharmaceutical product and biological development, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve profitability. If we are required by the FDA, the EMA, or other regulatory authorities to perform studies in addition to those currently expected, or if there are any delays in completing our clinical trials or the development of B-VEC, KB105, and KB301, our expenses could increase and revenue could be further delayed.
We will need to raise additional funding in order to receive approval for B-VEC, KB105, KB301 or any other product candidate. Such funding may not be available on acceptable terms, or at all. Failure to obtain this necessary capital when needed may force us to delay, limit or terminate certain of our product development efforts or other operations.
To complete the process of obtaining regulatory approval for B-VEC, KB105, and KB301 and to build the sales, marketing and distribution infrastructure that we believe will be necessary to commercialize B-VEC, KB105, and KB301, if approved, we will require substantial additional funding. In addition, if we obtain marketing approval for B-VEC, KB105, or KB301, we expect to incur significant expenses related to product sales, medical affairs, marketing, manufacturing and distribution. Furthermore, we expect to continue to incur significant costs associated with operating as a public company. We anticipate that we will need additional funding to complete the development of B-VEC, KB105, KB301 and any future product candidates and to commercialize any such approved products.
Our future capital requirements will depend on many factors, including:
the progress, timing, results and costs of our Phase 3 clinical trials for B-VEC;
the progress, timing, results and costs of our Phase 1/2 clinical trials for KB105;
the progress, timing, results and costs of our Phase 1 clinical trials for KB301;
the continued development and the filing on an IND application for other product candidates;
the initiation, scope, progress, timing, costs and results of drug discovery, laboratory testing, manufacturing, preclinical studies and clinical trials for any other product candidates that we may pursue in the future, if any;
the costs of building and maintaining our own commercial-scale cGMP manufacturing facilities;
the outcome, timing and costs of seeking regulatory approvals;
the costs associated with the manufacturing process development and evaluation of third-party manufacturers;
the costs of future activities, including product sales, medical affairs, marketing, manufacturing and distribution, in the event we receive marketing approval for B-VEC, KB105, KB301 or any other product candidates we may develop;
the extent to which the costs of our product candidates, if approved, will be paid by health maintenance, managed care, pharmacy benefit and similar healthcare management organizations, or will be reimbursed by government authorities, private health coverage insurers and other third-party payors;
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the costs of commercialization activities for B-VEC, KB105, KB301 and other product candidates if we receive marketing approval for B-VEC, KB105, KB301 or any other product candidates we may develop, including the costs and timing of establishing product sales, medical affairs, marketing, distribution and manufacturing capabilities;